Garnaut warns of end to commodity super cycle

Professor Ross Garnaut has published a seminal paper on the future demand for resources we can expect to emanate from China in the Agricultural and Resource Economics Journal and the news is not terribly bright. Below find the article’s abstract. Below that a longer version with the section of the paper that matter displayed and for the real masochists, below that, the full paper.

So far as I can tell, Australia is ill- prepared for this eventuality.

Here is the Abstract:

Commodity prices are formed by the interaction of global economic growth and costs of expanding supply of commodities. They tend to be high for long periods when global average growth rates are high, and low for long periods when growth rates are low, and to fluctuate around these averages as short term demand departs from expectations. The growth of advanced developing countries is especially influential in determining global demand for resources. Exceptional growth and resource intensity of China have been the main determinants of high energy and metals prices since about 2003. Short term cyclical factors have pushed energy and metal prices higher still, because markets did not anticipate the strength of Chinese demand and supply takes time to catch up. The high resource intensity of Chinese growth has been the result of high investment rates and rapid increases in urban population and the export share of production. Strong growth is likely to continue although at slowly receding rates, but growth will become less resource intensive, leading to moderation of global commodity prices. Strong growth in China and the world are at risk if effective policies are not adopted to break the nexus between economic growth and pressure on the environment.

Australia is currently experiencing a resources boom of historical dimensions. Its immediate cause is sustained rapid resource-intensive growth in China. Australia’s terms of trade have reached heights unknown on a sustained basis in the historical record. Australian exports are now (although in the 21st century decreasingly) more diversified away from commodities than they were through most of its history, so relative prices of commodities had to move higher than in earlier times to take overall terms of trade above peak levels in the late nineteenth and most of the 20th century.

After several years in which investment in expanding supply capacity lagged behind the lift in prices, the rates of growth of investment in the resources sector have been rising strongly since about 2005. Since the Global Financial Crisis of 2008, resources have been overwhelmingly the main contributor to exceptional growth in Australian business investment in general. Minerals and energy production and investment together are now larger relative to other sectors in the Australian economy than at any time since Federation.

The rising and eventually exceptionally high terms of trade kept Australian incomes and public revenue growth well above the rate of expansion of production for several years from 2003 to 2008. Commodity prices receded temporarily with the Global Financial Crisis. Since then, the growth of public revenues has been moderated by the effects of the exceptionally large capital expenditure in resources on deductions against income and resource rent taxes.

The rising terms of trade from 2003 allowed Australia to avoid what would have been a painful and probably recessionary end to a virulent early 21st century housing and consumption boom. The high rates of business investment in the resources sector have been a major factor in the strong economic growth performance of Australia relative to other developed countries in the aftermath of the Global Financial Crisis.

The resources boom has shifted the centre of gravity of national economic growth decisively to western and northern regions. This has challenged longstanding assumptions of Federal fiscal relations, which had been calibrated to redistribute public revenues from Victoria and New South Wales to the smaller states and the two territories.

The resources boom is global and not only national and so is changing fundamentally the environment for Australian international relations. Amongst our immediate neighbours, in Papua New Guinea, the China boom has provided the foundations from which the public finances have been rebuilt, economic stability restored and strong economic growth established after a decade of stagnation. Growth has been assisted in several Southeast Asian economies – although for a while less powerfully than might have been expected in Indonesia, as it grappled with the implications of the political decentralisation that accompanied the transition to democratic government at the beginning of the new century. Economic growth has been enhanced in Brazil, Chile and other resource-rich economies in Latin America (although not Mexico), which emerged from periods of difficulty in the 1990s into better economic times. Chinese investment and demand is incubating new projects and industries through many countries in Central Asia, the Middle East, Latin America and Africa. In Africa, a buoyant resources sector has been one element of a marked lift in economic growth trajectories in the early 21st century in all countries that are not experiencing high levels of political disorder. The boost from the new international resources environment has supported Russian economic performance and self-confidence, with implications running through domestic and international political arrangements. It has expanded the economic power of oil exporting countries in the Middle East.

For all of these reasons of national economic change and international relations, it is of great importance to Australian national policy to understand the origins and dynamics of the resources boom, its future dimensions, and its likely longevity and stability.

This paper focuses on the central cause of these changes rather than the wide-ranging implications. It begins with analysis of the economics of price determination in the resources sector. It examines the recent increases in prices for energy and metals and their origins in exceptional growth in Chinese demand. It shows that without China’s contribution, there may have been no growth in demand for many mineral resource products in the second half of the first decade of the 21st century. The paper examines the sources of especially strong growth of Chinese demand for resources. It discusses the prospects for continued growth and structural change in China, and how this will interact with wider developments in global supply and demand for resources to determine the longevity of the current Australian and global resources boom. In assessing possible future developments, the paper illustrates some possibilities from the experience of rapid economic growth in other Northeast Asian countries at earlier times, while noting differences between economies. It also analyses the implications for resources demand and prices of prospective structural change as China moves through the ‘turning point’ in economic development in which labour becomes relatively scarce and expensive (Lewis 1954Ranis and Fei 1961, 1963Minami 1973).

Here are the longer key sections:

The longevity of Australia’s China resources boom depends on the prospects for continued strong economic growth in China, on the resource intensity of that growth and on the extent to which the resource-intensive industries are integrated into international markets. These concluding remarks speculate about each of these factors in turn.

The first and second of the determinants of future import demand for energy and metals – the rate of economic growth and resources intensity – will be affected by scarcity of labour and the associated increases in real wages over the remainder of the 2010s.

China has entered the ‘turning point in economic development’, or rather, in a large and geographically differentiated economy, the ‘turning period’. This is the transition from a labour surplus economy with comparative advantage in labour-intensive products, to an increasingly diverse economy, with diverse comparative advantage centred upon capital-intensive and technologically sophisticated products (Cai 2010; Garnaut 2010 and other contributions to the special issue of the China Economic Journal, vol. 3, July 2010, Garnaut 2011c).

The large increases in real wages will reduce the profit share of income, and with it China’s prodigious savings rate. It will reduce the profitability of and, therefore, the incentives to invest in the labour-intensive industries that have played a major role in China’s growth over the three decades of the reform era.

But these developments will not necessarily reduce the investment rate. That depends on the expected profitability of investment. That, in turn, will be affected by productivity growth in the business sector and the effectiveness of provision of the public goods that become more critical to strong growth as incomes rise: regulatory systems, education, transport and communications amongst other services. If incentives to investment remain strong, the maintenance of a high investment rate can be reconciled with a falling savings rate through reduction in the current account surplus. This reconciliation is evident in the years since the Global Financial Crisis.

The quality of macroeconomic management also affects incentives to invest. The maintenance of macroeconomic stability will be more challenging through the transition out of the labour surplus economy. There is no need for rapidly increasing real wages to be associated with markedly higher inflation: this source of instability can be avoided through the combination of firm monetary policy and nominal appreciation of the currency. But there will be pressures for the authorities to appreciate too little and for inflation to accelerate to an extent that requires retrenchment and an otherwise unnecessary loss of growth potential.

My own assessment is that the investment share of expenditure will remain near the high rates of recent years until the middle of the current decade and then decline moderately.

The relative backwardness of China at the beginnings of internationally oriented reform and rapid growth, together with the magnitude of the obstacles to reform, means that economic growth can proceed at high rates for longer than in its Northeast Asian neighbours before productivity growth isslowed by proximity to the global frontiers. Some increase in total factor productivity growth will be generated by rising wages focussing attention on more economic use of scarce labour.

The third determinant of the rate of growth alongside investment rates and productivity increases is the labour supply. The total number of workers will soon begin to fall, and the fall will accelerate over time. Alongside decline in the total labour supply, there will be rapid increases in the stock of human capital per worker, as large increases in education expenditure are focussed
on declining numbers of school children.

These perspectives on growth in the capital stock, productivity and labour supply are embodied in projections within a growth-accounting framework that I undertook for the Garnaut Climate Change Review. The projections took as their starting point Perkins and Rawski 2007. The projections, incorporating my own judgements on investment rates and productivity growth, pointed to average growth of output at a bit below 10 per cent 2009–2015 and then a bit below 7 per cent per annum 2015–2030 (Garnaut 2011d 1 ).

Something like this remains probable, although necessarily uncertain, and with the cycles associated with a market economy, and the inevitable bumps in the path of rapid, sustained economic growth.

So the prospect is for continued growth a bit below the average of the early 21st century to 2015 and then at about two-thirds of that level on average to 2030. At the end of the period, the Chinese economy would be about four times its current size.

How resource intensive will this growth be?  Will Chinese growth turn out to be more like the highly energy- and metalsintensive growth of Korea (especially) and Taiwan, or more like the developed countries that reached high living standards at an earlier time in global economic development? Here, it is salutary to recall that Japan through the 1950s, 1960s and early 1970s followed a distinctively ‘Northeast Asian’ growth path with unusually high resource intensity, until high energy prices, focus on ‘resource security’, and policy driven by national economic strategy greatly reduced resource intensity from the late 1970s.

A continued high investment share of expenditure at least to 2015 is positive for high resource intensity of economic activity.

On the other hand, the high rate of urbanisation of the reform period so far will diminish, simply as a matter of arithmetic, now that around half of the Chinese are living in townships and cities. Moreover, and unlike almost any other country, there are some signs that anticipatory investment in transport and other urban infrastructure may reduce future investment demand.

Decelerating urban growth and recent high rates of urban investment are negative for high resource intensity in the future. High energy and metals prices and concerns about resources security have made efficient use of resources a major objective of policy in China – just as they did in Japan from the late 1970s. In China’s case, concern about global climate change has made the reduction in the greenhouse emissions intensity of production and consumption a major policy objective since about 2008 (Garnaut 2011a; Wen 2011). The climate change considerations will lead to lower rates of increase in energy use and a reduction in the emissions intensity of energy production. This is likely to be strongly negative for fossil fuel consumption, especially for coal. These influences are negative for metals intensity, more for energy intensity and most for fossil fuel intensity. The high export orientation of the Korean and Taiwan economies as they matured and developed new comparative advantage in capital-intensive products contributed to high resources intensity. China has entered a period in which the increase in the export share of output is decelerating. This is likely to continue. On this characteristic, China may end up in an intermediate position between Korea and Taiwan on the one hand, and the old, established industrial countries on the other.

Export orientation seems likely to be a neutral influence on future resources intensity, rather than positive as in Korea and Taiwan.

There are rather stronger factors pushing China in the direction of the resources intensity of Japan and the old industrial countries, than in the direction of Taiwan and Korea.

What is likely to happen to the import share of Chinese resources demand? The liberalisation of trade contributed a great deal to the increase in resources imports from the beginnings of reform in the late 1970s to late in the first decade of the 21st century. But this was a once-for-all positive influence on global metals and energy prices. Any further positive influence is likely to be balanced by the negative impact on resources demand of raising energy prices to global levels.

As in the 1960s, new institutional arrangements (the Chinese multinational corporation) and new suppliers (Papua New Guinea for nickel and several African and Latin American and Central Asian countries for a wide range of metals) are the focus of large investments. This will be moderately positive for the import share of resources demand, but not for the shares of established suppliers such as Australia.

It is likely that the Chinese economy will continue to grow strongly for the foreseeable future, although at moderately declining rates from about 2015. Resource intensity of production will decline rather more rapidly than seems to be the common expectation and more rapidly still as growth and the investment share of output fall from about 2015. Current global resources prices and investment levels seem to embody expectations of continued rapid growth in demand for resources along the lines of the early 21st century so far. This is encouraging huge expansion of supply of many energy and metallic minerals – all those for which there are opportunities in nature for large expansions of production at relatively low cost. The analysis of this paper suggests that these expectations may be disappointed. The next large adjustment forced by Australia’s China resources boom is likely to be to markedly lower terms of trade and resources investment.

I have been looking at long-term tendencies. China’s rapid growth involves economic, social and political change on a scale that is unprecedented in world history. It is unlikely to proceed over decades without bumps in the road, and an occasional dead end and detour. With China in the 2020s consuming more resource-based products from world markets than the whole of the currently developed world, the rest of the world will feel every bump through energy and metals markets.

Prices and investment in the resources sector are in their nature volatile. As the Australian economy is restructured to expand the role of the resources sector, the inevitable fluctuations in activity in China’s market economy will challenge Australia’s capacity to maintain economic stability.

This paper has been about the China resources boom, but global development does not end with China. The contemporary China resources boom may lead into a more widely based resources expansion, built on accelerated development in many developing countries. It would have to be truly widely based to fill the China gap in demand growth: no other large part of the developing world is likely to grow with anything like the resource intensity of China, although some countries, including India, may come to grow as fast. I leave the question of whether acceleration of growth elsewhere can make up for the anticipated deceleration in growth in China’s resources demand for others or another time.

Finally, one only has to identify the possibility of China absorbing more resource-based products than the currently developed world to raise some fundamental questions about ‘limits to growth’. The experience of development, and not only our theory, inform us that higher prices induce expansion of output and substitution in supply and demand for scarce resources, as well as some modification of the rate and pattern of economic expansion. But while, in the end, supply will equal demand at some higher level of global economic output, the process of adjustment is of great importance and can affect economic activity in the rapidly growing economies and elsewhere.

Another constraint is more fundamental. Economists who draw from the common scientific heritage of humanity are aware that modern economic growth could be prematurely disrupted and in some circumstances truncated by external environmental costs of modern economic growth. The risks to long-term growth can be ameliorated at small short-term economic cost through policy adjustments that internalise the external environmental damage. The limits to growth associated with pressure on natural resources are defined in practice by the capacity of our political systems to apply efficient policies (Stern 2007; Garnaut 2008, 2011a).

And the  full paper:




  1. Ranier Wolfcastle

    Is their anything new in this? The per capita analysis is used and we’ve seen that on MB before via iBanks and we’ve also seen alternative analysis (Nomura) but in all cases it seems hard to find the bearish case in that analysis. Garnuat’s projections of investment growth a pretty bullish actually.

    In the bearish camp we have Pettis with his projection of 3% growth over this decade. Garnaut and others are moderately bullish IMO but mega bullish in comparison to Pettis.

    Some of his stuff on coal seems self serving to justify his stance on climate change policy — note to those who want to go down the “denier” ranting path I am not making a statement on the validity of climate change, my statement is about assumptions of Chinese emissions.

    Lots of self referencing but you tend to get than in academic works.

    • Totally agree. Nothing new here. The jaunts into the climate spectre detracted, given increasing uncertainty over validity of AGW scientists claims of continued warming (James Lovelock last week) contrasted with Garnaut’s own enthusiastic embracing of climate change politics.

      Further, if anything, the paper may even enhance the prospects for the Australian resource sector on geographic and cost of production grounds. Demand will not end. Demand may moderate. Following Garnaut’s theory of continued (albeit moderating) growth, we are well placed to continue to benefit through to the end of the 2010s, and beyond, one would hope!

      (assuming no calamities).

      • given increasing uncertainty over validity of AGW scientists claims of continued warming

        Oh please. Do we have to endure this nonsense?

        The scientific consensus has not changed.

      • James Lovelock didn’t start anything related to global warming. I think you’re confusing him with James Hansen.

        Lovelock is known for his Gaia theory more than anything else, and being one of the first to notice the rise in CFCs in the 1970s.

      • Aristophrenia

        He claimed there would be only a few breeding pairs by the end of the century – in Antartica, and that this may have been too strong – he has not changed his mind, he has moderated his opinion.

        But that hasn’t stopped morons all over the internet claiming victory and that there is no global warming – idiots of the highest order.

        Are you one of these ? Need to know for posterity’s sake.

      • What’s new is that it’s Garnaut that is saying it. And if think that won’t freak out a few of your sell ’em dirt mates, you’ve also got rocks in your head.

      • Ranier Wolfcastle

        …but what in his comments that would freak people out? I read this thing and it didn’t seem to be that far from the projections of the major miners.

        As above, Pettis prediction are the sort of stuff that would/should freak people out if there is a chance of them being right. Garnaut’s stuff is bullish IMO — the arguments he puts forward support a belief among miners of increased demand, certainly for the remainder of this decade.

      • In China’s case, concern about global climate change has made the reduction in the greenhouse emissions intensity of production and consumption a major policy objective since about 2008 (Garnaut 2011a; Wen 2011). The climate change considerations will lead to lower rates of increase in energy use and a reduction in the emissions intensity of energy production. This is likely to be strongly negative for fossil fuel consumption, especially for coal.

        Well Professor Garnaut has greater FAITH in human nature, Communists and the Chinese to do the right THING than I or the majority of the West do! They are now the biggest polluter in the world and to hear this furphy makes me cringe – from Gillard, Swan, Turnbull, Brown & Garnuat; all singing from the same Hymn sheet…..but alas not grounded in reality.

      • Ranier Wolfcastle

        that part of it caught my eye as well. He is referring to rates of increase in energy coupled with reductions of emissions intensity and concludes that it is negative for coal!

        A negative for coal would be if the rate of increase of supply outpaced the rate of increase in demand. But he doesn’t investigate this at all. It’s just speculation.

      • Stormy WatersMEMBER

        Not true.

        If demand is growing, but you want to reduce the emissions intensity of every MWh that used then the only way to do that is to meet incremental demand (the growth) with significantly lower emissions intensity plant than the overall emissions intensity you are trying to get the system to. I.e. the new plant needs to dilute the old dirty stuff so that the overall average intensity drops.

        That means no new coal to meet demand. You can only do it with gas/renewables.

      • Ranier Wolfcastle

        is that directed at me or Neil Innes?

        Garnaut doesn’t produce evidence that no new coal power is being added or that new coal power stations will stop being built at a certain point. Coals prices depend on supply and demand. There was no attempt at quantifying this in his paper.

        The record to date shows an increasing demand for thermal coal. The rhetoric about what they might do is fine but when will they do it? Last year people were quoting the official Chinese estimates of emissions per new GDP unit and those numbers were pretty good for coal (hence the frustration of e.g. Lorax).

      • Stormy WatersMEMBER

        It’s meant for you Ranier.

        I agree that what they say and what they do are two things. However, if they do want to reduce emissions intensity across all electricity demand then they can only do that by meeting incremental energy demand with gas/renewable instead of coal such that the new clean stuff dilutes the existing dirty stuff thereby reducing the overall average intensity.

        When you say “He is referring to rates of increase in energy coupled with reductions of emissions intensity and concludes that it is negative for coal!” you are missing this point. Garnaut is not.

      • Ranier Wolfcastle

        assuming for the sake of argument they do it, and not just talk about doing it, to quantify the effect on coal you need to quantify the emissions reductions against rate of increase of energy production. For example it is possible to be reducing average unit emissions while still increasing coal consumption. Therefore you need to quantify these supposed reductions against supposed rate of energy increases in order to support forecasts about coal. Something Garnaut doesn’t do — the point you have missed.

      • Stormy WatersMEMBER

        No, again you don’t really understand how energy works. If you want to reduce emissions intensity by any appreciable amount over a timescale of years, not decades, then for a country like China that is dominated by coal new build capacity needs to have a considerably lower emission intensity such that the overall average drops.

        Your choices to meet growth in energy are:
        – build coal, emissions intensity gets slightly better over time but this won’t give you any appreciable reduction in overall intensity of emissions for the country (at least not for about 30 years).
        – build CCGT gas, overall EI will start to drop within a decade
        – build renewables/nuclear, overall EI will start to drop within 5 years.

        You don’t have a set of choices that leads to a continuous spectrum here. It’s not some infinitely tune-able outcome that depends on the rates of energy growth versus the target unless the target. If you want to drop the emissions intensity of a predominantly coal-fired nation within 10-20 years you need policy settings that ensure all new build plant to meet demand growth is gas/renewables/nuclear.

      • Ranier Wolfcastle

        If you want to reduce emissions intensity by any appreciable amount over a timescale of years … etc etc

        What is the “appreciable amount” that emissions are to be reduced by. This is the point you keep missing. It is not stated in the article.

        From your last sentence you are operating under an assumption no new coal power is going to be added. You appear to be introducing your own view on the reduction and then arguing about coal consumption that supports your level of emissions reduction. By definition is you assume that then by virtue of your circular thinking it is bad for coal.

        But I am commenting solely on Garnauts article. He speaks of reduction in emissions but there is no number to indicate how big this reduction will be. The reduction target is not quantified. My original point was that in the absence of a quantified reduction (official one from China not a blog commenter) a forecast about coal is meaningless.

      • Stormy WatersMEMBER

        OK…a bit more simply then.

        If policy settings are such that new coal is built you will not get any kind of reduction in emissions intensity except for small improvements due to technical advances in the efficiency of coal plant. When Government’s talk about limiting emissions intensity they usually want to take it to a level that is materially lower than the current level within a reasonably short time frame (i.e. 10 years). Otherwise it is all talk (or a smokescreen for inaction).

        If you set policy to build something cleaner than coal then emissions intensity will start to fall over time. The next cleanest thing – gas fired CCGT for baseload energy – is roughly half the intensity of coal. So it really is a choice to do nothing (and let coal be built) or do something (force CCGT or cleaner to be built) and have a relatively quick impact. The rate it falls at is a function of the emission intensity target, energy growth rates, relative costs, etc. But the point is you’ve set policy to ensure that something cleaner than coal is built (and that coal is not).

        The scheme is the mechanism to achieve the policy objective of less emissions (either absolute or per capita).

        So a government will either run a scheme (emission intensity/carbon price/clean energy subsidy/etc) that ensures that new coal is not built and the policy objective of less emissions is achieved or they won’t, and coal will meet growth in demand and emissions will grow and intensities will stay roughly the same.

        That’s the choice the Chinese policy makers face. And if they choose to limit emissions intensity in any real way they will implicitly be choosing to keep coal-fired generators out of the mix of new investment with a follow on effect in the demand for coal.

      • Alex Heyworth

        Looking at what China is actually doing, rather than the rhetoric, it is clear that they are continuing to build power stations of every possible variety. Coal, gas, nuclear and renewables are all in the mix. Because they are building power stations of all kinds, whereas the current mix is dominated by coal, the average emissions intensity can decline at the same time as coal consumption increases. I foresee increasing reliance on gas, particularly as China itself has substantial shale gas reserves.

        Another point I think Garnaut has possibly missed is that present Chinese energy consumption is dominated by industry, particularly steel production. As steel production drops off, you would expect energy consumption to drop off, all other things being equal. But other things are not equal. The rise of the middle class in China will inevitably mean huge increases in domestic energy consumption to power all the appliances the middle class will buy. If it were not so, why would the government be building power stations as fast as it can?

      • James Lovelock was predicting some pretty wild things, something to the tune of the end of human civilisation by the end of the century. He has retracted these comments based on them being patently absurd.

        Note that a theory is only disproved by measured evidence. Have CO2 levels or methane levels dropped recently? Have the oceans started to take on appreciably more/less GHG recently? Have we discovered that it is actually nuclear disintegration in the earths core that stops the earth being -15C? Are we actually closer to the sun then we realised, so surface temperatures should be higher? Are increased cosmic rays increasing cloud cover?

        No. The science remains unchanged. For a quick review of the science, see Tom Murphy’s blog (you may require a calculator and a couple of hours to think about it) The only thing that isn’t really covered is the absorption of CO2 by the oceans… but there is enough here to get a feel for the numbers.

        For an idea of what would happen if we were to use oil and gas reserves, but drastically reduce coal consumption, see the following from James Hansen:

        Hansen indicates that their is plenty of warming still in store from the current level of greenhouse gas, about another 2C. The question is no longer ‘will we lose the polar ice sheets’ but ‘when will we lose the polar ice sheets’.

        The rapidity of global changes and the region by region changes of climate are the big areas of remaining uncertainty.

      • Tom Murphy is morphing into a bit of an environmental pinup boy, the latest guru it would seem.

      • Hardly. He is a concerned physicist talking about real and measurable quantities… without using ridiculous units like ‘powers 10000 houses’ or ‘like planting 1000 trees’.

        David McKay from the UK has done a similar thing with his considerable volumne ‘Sustainability : without the hot air’ which is available online as well.

        If anything they illustrate just how much of a free kick fossil fuels were, and how hard (impossible) it will be sustain similar lifestyles on renewables.

    • I agree with MineBot 2.0 that Garnaut’s view on coal is flawed. I wouldn’t call it self-serving, I’d call it naive. China intends to do a lot of things, like reducing energy intensity, and rebalancing the economy towards consumption. It doesn’t mean it will happen. IMO, China’s expansion of coal-fired electricity generation will completely swamp any efforts to reduce emissions.

      FWIW, I reckon Garnaut’s view that the investment share of GDP will remain pretty constant until 2015 is about right. The wild card in all of this is sentiment. If the Chinese property boom turns to bust, I reckon it will happen quickly, and there will SFA the authorities can do about it.

      Oh, and I think Hugh Hendry, Jim Chanos, and Patrick Chovanec are even more bearish than Pettis.

      • Ranier Wolfcastle

        Oh, and I think Hugh Hendry, Jim Chanos, and Patrick Chovanec are even more bearish than Pettis.

        possibly. I haven’t read much of Chovanec so can’t comment. Chanos was quoted the other day as being long BHP so go figure. Hendry has a good investment record but his stuff the other day seemed pretty flawed to me — his economic prism seems to be totally different to e.g. DE or S.Keen etc. So despite his record I wonder if he has the right tools to be trusted on this.

      • IIRC, Chanos was saying he’d much rather be in BHP than Rio or FMG, because they’re so leveraged to the China construction boom, whereas BHP is more diversified.

        Here’s the quote:

        ”In our hedge fund, we are long BHP vs Fortescue and others,”

        But hey, spin it how you like. That’s your job after all!

      • Ranier Wolfcastle

        it is not spin it was a very strange comment from him given 2-3 years of public comment about China and miners. There is no reason to be long BHP (given his public views). BHP/FMG is not long-short paring. Chanos was publicly saying at one time that shorting miners is a way of shorting China.

  2. Is this the same Ross Garnaut who predicted the end of the world as we know it because of climate change & global warming and said the Big New Tax will fix all of the world’s ill’s? 12 years of no more rising in earth temperatures later, I would take this mans analysis on China with a grain of salt!

    • Yes, it’s the same Ross Garnaut that saw the rise of China, was instrumental in the productivity revolution that drove Australian prosperity in the nineties, that warned of its demise and rise of unsustainable debt in its place. And that scientific consensus clearly still agrees with on climate change.

      It’s easy to pick on stuff you disagree with to commit ad hominem, but isn’t very convincing.

      • An irony H&H, you are the one cherry picking – the ‘consensus’ is a complete fabrication & furphy ( I would link, but I know that with your blinders & prejudice you wont bother to look at the websites – probably think it’s too right wing, but I read left & right H&H) – if I told you that over 30000 scientist do not agree with AGW, you will tell me that only 2% do not agree, but that research was based on a poll of 77 scientists. So let us be CLEAR & HONEST, this is a question of faith & belief & ideology; I do not believe that man is killing the Earth or that he can with CO2…..we are ticks on a Gnat and the FACT is global warming has stopped. As for Garnaut – well he and Lovelock can change their mind’s when they realise that they have been ALARMIST.

      • The consensus is unchanged. That’s a fact. I’m not going to debate it anyway given the post is about commodities and only your attempting an ad hominem.

      • FACT -something that actually exists; reality; truth: Your fears have no basis in fact.
        something known to exist or to have happened: Space travel is now a fact.
        a truth known by actual experience or observation; something known to be true: Scientists gather facts about plant growth.
        something said to be true or supposed to have happened: The facts given by the witness are highly questionable.

        Well according to the definition H&H of the word FACT, you have jumped the shark…..AGW has not been empirically proven, factually – red herring to say ‘ad hominen’ as I am certainly not attacking your good name or character, but you want to shut down debate? Strange. The moon is made of cheese, I read it in children’s story, that settles it? Sorry reality does not work like that.

      • One thing is certain in the AGW debate, the science and the consensus will modify over time.

      • Science doesnt operate by consensus H&H. A “consensus” is completely meaningless if the data is against you.

        Fact: the climate model projections are significantly different from actual temperatures, and the so-called “consensus” scientists dont know why.

        Its bleeding obvious if you look at the models themselves and the data being fed into them. Having done plenty of long-term modelling myself it was patently obvious from the beginning that the climate models were tuned to produce an outcome that was way too high.

        The results are being played out now.

        Those, such as Garnaut and yourself, who simply accept the “consensus” do so from a position of ignorance on the science itself.

      • One thing Niel.

        When it comes to AGW theory, MB is an echo chmbers of alarmism.

        Move on.

      • I have realised that Rusty Penny – but it is fun to go the tonk with some true believers at times!

      • drsmithyMEMBER

        Science doesnt operate by consensus H&H. A “consensus” is completely meaningless if the data is against you.
        The scientific consensus is driven by the evidence.

        Those, such as Garnaut and yourself, who simply accept the “consensus” do so from a position of ignorance on the science itself.
        The science hasn’t changed. Global warming is very real, and substantially driven by CO2. The trend is decades (if not centuries) long and unmistakable. The only volatile aspects are exact timelines and magnitudes.

        An analogy with the Australian housing market: no-one can predict exactly when it will correct, at what speed, or by what amount. However, everyone who isn’t a vested interest agrees it is inevitable.

    • So global temperatures have returned to 1900 levels?

      So CO2, methane and SF6 levels are now dropping?

      So oceans are now becoming less acidic?

      So the polar ice caps are increasing in size? The artic passage is becoming harder as ice levels increase?

      So the earth is kept about -15C other than green house gases?

      So it was N2 and O2 that have been keeping us warm all along?

      No. You will need a bit more evidence than the observation of a short term plateau global temperatures.

  3. “As in the 1960s, new institutional arrangements (the Chinese multinational corporation) and new suppliers (Papua New Guinea for nickel and several African and Latin American and Central Asian countries for a wide range of metals) are the focus of large investments. This will be moderately positive for the import share of resources demand, but not for the shares of established suppliers such as Australia.”

    So the focus of large investments in cheaper supply regions will not effect us in OZ. Did anyone dig deep enough to see how this premise is substantiated?

      • The style of the whole piece is very foreign to what I normaly see as an Engineer. Am I outing myself as dumb for needing summaries, charts, graphics and clearer footnoting of source data?

      • Perhaps he needed help writing it…HnH is a bit of a wordsmith, likes the topic and is probably willing. 🙂

      • Less words would be welcome. I’m drowning in ideas but there is little guide for “occurance, severity & detection” or whatever it is you financial types use for risk assessment and prioritising.

      • Ranier Wolfcastle

        This article was more like an op ed. A nice article in contrast from from a PhD student that was linked here a week or so ago. The guy collected quite a lot of data and provided some supply and demand analysis. So the data he used to form his views was there for examination.

  4. There are glaring holes in this report.

    How can you talk about China, energy and steel and not give us any projections about supply of coal, oil or iron ore globally and within China.

    Equally how much energy and steel would it take to transition a Chinese economy from coal to wind, solar and nuclear? Is this even a possibility?

    You can’t talk about the ‘end of coal’ in China when it supplies 70% of their current energy needs without giving some indication of how this would happen (barring recession/wipeout of larges chunks of the Chinese population).

    In addition I find it extraordinary that Garnaut assumes that declines in fossil fuel consumption would be voluntary! Pundits within China expect their coal production to peak by 2030.
    Americans Tadeus Patzek and David Rutlege both expect it to occur by the end of this decade. (have the paper and links at home, apologies) Lo and behold the Chinese government is now saying they would like to curtail production to a plateau by 2015. As if they had a choice!

    It seems a dim possibility that the Chinese will transition smoothly from an economy run from coal energy to renewable energy. Will they make advances in nuclear energy e.g breeder reactors? If they are going to try a transition (including electrification of transport) how much steel will be required?

    So start again. Some mention of tonnes, joules and watts would be desirable.

    • In their current form solar and wind are a pipedream. They DO NOT provide reliable or cheap BASE LOAD power…..and it isn’t even debateable. So if transitioning from coal to other energu sources, you can currently count these two out.

      • Solar thermal definitely can, as evidenced by Gemasolars (admittedly small) 20MW plant that can run 24hr a day with 16hrs of molten salt storage.

        That can be easily built out in the US, Australia and North Africa. No resource constraints when it comes to glass, steel or concrete, however the oil required in initial construction may be an issue.

        If CSIRO is successful with their Brayton cycle solar thermal plant, there is the possibility of solar thermal without the need for water. The only other I know of that could do this are solar updraft towers, however solar updraft towers suffer from requiring tall (800m) chimneys and relatively low W/m2 compared to other concentrating solar.

        In its current form wind could easily supply 15-30% of our electricity needs – nothing to be sneezed at exactly. They would act more like a ‘range extender’ for natural gas, which can be ramped up and down quickly enough to cope with variations in wind.

        Also in terms of renewables, only the solar and wind resource could replace our current flow of energy. Hydro, tide, geothermal and biomass can all make notable contributions but the amount of energy that could be extracted would never be able to replace our current consumption of fossil fuels.

        So it might be a pipe dream that we would curtail consumption of steel movers and widgets in order to build out a sustainable energy system but it can be done.

      • Distributed energy networks solves reliability and baseload issues. It’s always sunny somewhere. It’s always windy somewhere. There are always hot rocks somewhere. There are always waves somewhere. High Voltage Direct Current (HVDC) powerlines can transport electricity over long distance with minimal losses.

        All you need is a plan to put it altogether… like, I dunno… these guys:

        Or for Australia specific:

        Cheap? No. Worthy of long term investment? Hell yes. But heaven forbid we invest in anything that won’t see substantial returns for a generation.

    • Ronin8317MEMBER

      The Chinese government accepts climate change as a fact. Furthermore, they understand the country with the industrial base to produce renewable energy will rule the coming decade because all fossil fuel will become more expensive.

      China’s current growth rate is unsustainable. When something cannot continue forever, it will stop.

      • I agree that China’s current growth rate is unsustainable. And they definitely have the industrial base for renewable energy.

        But I think China’s coal resources (and hence dominant energy source) are wildly overstated, and will reach constraints within this decade regardless of the Chinese attitude to global warming.

        If China manages to struggle through a transition to renewables(without huge civil unrest etc) countries that have excess coal and iron ore will be well positioned to benefit.

      • do you get a bonus for steering the conversation that way?

        Sadly, that may well be the case.

      • Yes I get paid to blog by Palmo, Twiggy & Hancock…….a fifth element so to speak……YES, I am kidding, I hope you guys can take a joke. I am interested though, that I have similar views in overpriced property as most of the bloggers & contributors on MB, and you guys rail against the ‘consensus’ of the MSM as it relates to property, but it is the same with climate change – the consensus is settled with the MSM or is it?

      • Is the The Australian part of the MSM? Fox News? The WSJ? All of these have been running a war on science for many years now.

        I rail against stupidity, not consensus.

      • The reality Lorax is that media in Australia is still free from onerous censorship, you would more pleasantly be agreeable to Fairfax, as opposed to News Corporation – what scares me and I do not know you enough Lorax, is the media enquiry that wants to stop me and millions of others who disagree with the ‘consensus’ on climate change. Now then you would see blogging on a scale in Australia that is on steroids! – luckily for me & others, Tony Abbott believes in freedom of speech also! Lastly Lorax, if AGW is the greatest challenge of our times (not poverty, nuclear weapons or an unstable middle east) would not the great President Obama have done something? NO – he cannot, because the whole issue has been over inflated and blown out of all proportion!

      • Neil FYI, I have always been of the opinion that serious action on climate change is politically impossible.

        Because climate change will play out on such long time scales, it can be plausibly denied for decades if not centuries. Denialists will go their graves believing themselves correct. Its also incredibly easy to campaign against a tax, and infinitely harder to campaign for it.

        You’re entitled to your beliefs. We live in a democracy after all. All I do is look at the balance of probabilities that the majority of climate scientists have it completely wrong. Sure its possible, but I would think it highly unlikely. As for AGW being some kind of hoax that’s motivated by securing funding or somesuch, I would say the chances of that are zero.

        Essentially you’re betting that science has made the greatest mistake in history. IMO, that is a foolish bet.

      • But Lorax, that is the point, the science is truly not settled – you mentioned Hansen before, head of NASA; but amusingly so many more of the NASA scientists are AGW sceptics and when Hansen retires, guess who the next in seniority will be? Yes, a AGW sceptic! This is the point, the Science is not settled and ‘consensus’ has not been reached!

      • What do you define as consensus? 100% agreement ?

        I reckon 80% agreement would qualify as consensus. Are you suggesting more than 20% of climate scientists disagree strongly with AGW?

        Again, all I can say, on the balance of probabilities, its more likely the 98% (?) are correct than the 2%. If you want to back the other side then fine, just don’t tell me that’s the rational choice.

      • drsmithyMEMBER

        I am interested though, that I have similar views in overpriced property as most of the bloggers & contributors on MB […]

        Well then this should get the point across:

        Global warming is like the Australian real estate correction (the CO2, in this analogy, is debt): all the evidence supports its inevitability, but no-one can predict the exact timing, magnitude or localised effects.

    • Let me guess 3d1k (and all the rest of the “man induced” climate changer deniers, minebots and China growth to infinity believers), you are Anglo Saxon, minimum of 40, but probably more likely 50 or older, with grey hair? in other words typical of about 90 percent of deniers, especially the most vehement ones.

      Well here is a little explanation to convey why the the “facts” might not be quite as clear as you would like them to be before making any changes to your precious lifestyles.:

      “Imagine a magic pipette. It is magic because every drop of water that comes out of it will double in size every minute. So the first minute there is one drop, the second minute there are two drops, the third minute four drops, the fourth minute eight drops and so on… This is an example of exponential growth. Now, imagine a normal sized football stadium. In this stadium you are sitting on the seat at the very top of the stadium, with the best overview of the whole stadium. To make things more interesting, imagine the stadium is completely water-tight and that you cannot move from your seat. The first drop from the magic pipette is dropped right in the middle of the field, at 12pm. Here’s the question: Remembering that this drop grows exponentially by doubling in size every minute, how much time do you have to free yourself from the seat and leave the stadium before the water reaches your seat at the very top? Think about it for a moment. Is it hours, days, weeks, months?
      The answer: You have exactly until 12:49pm. It takes this tiny magic drop less than 50 minutes to fill a whole football stadium with water. This is impressive! But it gets better: At what time do you think the football stadium is still 93% empty? Take a guess.
      The answer: At 12:45pm. So, you sit and watch the drop growing, and after 45 minutes all you see is the playing field covered with water. And then, within four more minutes, the water fills the whole stadium. This means that you think you are safe because it seems that you have plenty of time left, whereas due to the exponential growth you really have to take immediate action if you want to have any chance of getting out of this situation.”

      For the record I am 48, half Anglo Saxon, male and I am deeply concerned about planet destruction of all kinds.

      • I am a climate change agnostic. I am concerned about deforestation in emerging economies, pollution of waterways, contaminant particle air pollution, soil erosion, widespread loss of arable land, widespread use of hazardous chemicals etc.

        Not concerned about warming.

        I am a believer in human ingenuity.

      • All collateral effects from exponential growth.

        So how about ansering the question about your demographic profile?

        And what are you doing to change your lifestyle to mitigate the problems you list above?

      • Rigorous analysis there 4D. No doubt mirroring exactitude of your alarmist analysis.

      • drsmithyMEMBER

        I am a climate change agnostic.
        Heh. In the same way you’re a “political centrist” I imagine.

        I am a believer in human ingenuity.
        So am I. But I’m a bigger believer in physics.

      • And Dr.Smithy, what Physics are you talking about?
        perhaps this; Nobel Laureate Dr. Ivar Giaever: ‘The temperature (of the Earth) has been amazingly stable, and both human health and happiness have definitely improved in this ‘warming’ period.’ Oooops – I am guessing you still trust Scientists!

      • Ranier Wolfcastle

        …and China growth to infinity believers

        Who are the growth to infinity believers? The miners aren’t, Garnaut isn’t, various iBanks aren’t …who are these people? I’ve never met them or read them.

      • 4D – I’m late 40’s, quarter German, Scotch, Irish & English and I’m with 3d1k, looks like the great climate change meme & ideology has been lost. As you have mentioned, if you cannot get the kids/teens & young adults, the ‘Alarmism on AGW’ cannot be carried through. I do love this about our democracy, the Government & the whole Education department devoted it’s all to the conviction that man is warming the earth to death and it is one big FAIL…..Tony Abbott is going to repeal it, President Obama cannot implement an ETS and carbon pricing in Europe has collapsed. Now 4d – DENY that!!!!!

      • Climate change is not a meme or ideology. Its science.

        Now its certainly possibly that the science is wrong or partially wrong, but it strikes me as extremely unlikely that they’ve got it completely wrong.

        You, Abbott, and other “skeptics” are making the bet that science has made the biggest mistake in history. I think that is pretty foolish, bordering on stupidity even.

        You are entitled to your beliefs, but please don’t come here claiming climate science is an ideology.

      • “Now its certainly possibly that the science is wrong or partially wrong,but it strikes me as extremely unlikely that they’ve got it completely wrong.”

        Which is exactly why it is part science part ideology! Perhaps more the latter than the former.

      • I thought Abbott was not a skeptic. He just wanted to take a socialist, big government approach to tackling climate change, via his Direct (Government) Action policy.

      • Alex Heyworth

        You, Abbott, and other “skeptics” are making the bet that science has made the biggest mistake in history.

        Tell that to all the Jews, gypsies and people with disabilities who were sacrificed on the alter of eugenics.

        Science has been blighted in the past by horrendous blunders, and will continue to be in the future.

        In any case, most of the argument about climate change is not whether it is happening, but how much will there be (answer: nobody knows) and what can we do about it (answer: nothing until we get every significant industrial nation on side, whenever that might be).

      • You’re comparing moden climate science with eugenics? Seriously? Just how stupid are you people?

      • Alex Heyworth

        Lorax, I think you may have missed the point. You’re suggesting that people who claim climate change is nothing to worry about are betting that “science has made the biggest mistake in history”. I am simply pointing out that your claim that that would be the biggest mistake science has made in history is up against some fairly stiff competition. I could equally have used Lord Kelvin’s assertion that physics was completed, just before Einstein’s paper on special relativity. Science thrives on overturning its own mistakes.

      • Can we at least agree that carbon based energy sources are non-renewable? Or is the science not settled on that too?

      • drsmithyMEMBER

        I am simply pointing out that your claim that that would be the biggest mistake science has made in history is up against some fairly stiff competition. I could equally have used Lord Kelvin’s assertion that physics was completed, just before Einstein’s paper on special relativity.

        Perhaps you could highlight the “consensus” supporting these “scientific” opinions on the same scale as global warming.

      • What the hell is a ‘pipete’ Rusty Penny? Plain, simple english please!

      • I am guessing you take exception to the lack of political consensus, as it relates to the ‘scientific consensus’. Well blow me down with a feather – if the science was settled like it is with the reality of science, as it relates to ‘Gravity’ – well it would be a no brainer – but RP & Lorax it is not! No real consensus, no fact, no done deal – get over it!

  5. Can I stress. China may be worried about climate change, but it is not the top priority.

    China is worried about energy. Energy to sustain economic activity. You can’t expect to rely on domestic fossil fuels if you extract coal at a rate of 4Gt/year but you only have 200Gt of total resource.

    They are trying to grow sustainable energy sources. Will this make up for the shortfall in 20-30 years time? Good question

  6. The purpose is to provide food for thought if nothing else. To challenge the consensus view.
    What is the purpose of consensus view built on optimistic scenarios that may or may not prove correct?

    • I was not arguing for consensus opinion optimistic nor pessimistic.

      Just pointing out that what happens is what happens. Risk is everywhere. If individuals and enterprises focussed solely on the risks inherent in development nothing new would be achieved.

      It is sensible to be cognizant of risk but to focus solely on risk is as much a problem as ignoring it.

  7. e tu 3d1k, this is betrayal.

    Ross Garnaut was also Chairman of Lihir Gold, a great resources company. You should be singing his praise.